PC Hardware | T AIWAN
TECHNOLOGY
Ellen Tseng +886 2 2547 9339 ellen.tseng@tw.nomura.com
Analysts
Ellen Tseng
+886 2 2547 9339
ellen.tseng@tw.nomura.com
Lydia Lin (Associate)
+886 2 2547 9336
lydia.lin@tw.nomura.com
Our view
We examine PC hardware players’ growth prospects, competitive differentiation,
balance-sheet muscle, horizontal expansion, vertical integration, business model
sustainability, earnings risk and volatility. Valuations back our STRONG BUY calls
on Hon Hai, Acer, Compal and Wistron. Asustek is a BUY, Quanta a NEUTRAL.
Anchor themes
Among PC hardware companies, we prefer pure business models — either OBM or
ODM/EMS — as hybrid business often entails conflicts of interest. OBM players
leveraging strong outsource suppliers can improve efficiency, speed and costs.
Global EMS/ODM sales CAGR will slow to 9.6% in 2006-11F as outsourcing has
peaked. Winners will be sorted by cost control, scale, diversification of customers
and end-markets, investment in design, plus superior balance sheets.
Spurred by Microsoft Vista/Intel Santa Rosa, we see global notebook sales growing
27% and 22% in 2007-08F, with Asian brands growing faster than US OEMs.
Winning the west
􀁣 PC: mature segment still offers growth
We look for a PC unit shipment CAGR of 9.3% over 2006-11F, with the
main growth drivers being emerging-market demand and rising NB PC
penetration. Technology migration to Windows Vista/Intel Santa Rosa will
likely drive richer PC configurations, benefiting PC makers. Low-cost PC
initiatives, such as Eee PC, and UMPC penetration could differentiate
product offerings outside commodity segments. Despite limited
commercial impact in 2007F, these stand out as key 2008F themes.
􀁤 EMS/ODM: support for horizontal and vertical ambitions
With focus on utilisation keeping capex under control, rising asset turnover
has been boosting profitability at Taiwanese EMS/ODM players. Stronger
balance sheets have supported M&A activity, and the next phase of
growth will feature horizontal expansion and vertical integration. Both
strategies can build a competitive advantage: the former through
increasing addressable market size, the latter by reducing costs.
􀁥 PC OEMs: consolidation on the horizon
Operating margins supported by scale economies remain the chief
earnings driver at PC OEMs. Many low- to mid-level vendors have shut up
shop. The survivors are seeking M&A to build scale, diversify product
portfolios or segment allocations, and gain market share. The top 10
OEMs now have more than 65% of the market, and key players want to
expand margins in the wake of M&A.
􀁦 Plenty of value
We think Hon Hai leads the pack through its superior strategy and
execution. Our view is that Acer stands to gain from integrating with
Gateway. We also see Compal and Wistron as value plays, while Asustek
is a re-rating story amid restructuring.

Contents
PCs: mature segment still offers growth 3
PC demand: growth prospects 3
Various form factors on the horizon 6
EMS/ODM: support for horizontal and vertical ambitions 9
Sector capex/sales declining 9
Profitability passing the trough 10
Scale economies to improve OP margin? 10
Healthy free cashflow 12
Industry consolidation almost finished 12
Horizontal expansion and vertical integration 13
PC OEMs: consolidation on the horizon 18
Scale economies support superior margins 18
Superior growth of Asian brands 19
Can Acer succeed via its acquisition strategy? 21
Can Asustek duplicate Acer’s business model? 22
Plenty of value 24
Company profiles
Hon Hai Precision Industry 27
Acer Inc 31
Compal Electronics 35
Wistron Corp 39
Asustek Computer 42
Quanta Computer 46